Our firm receives frequent requests from fraud victims for general information about the fraud recovery litigation process. One of the questions often posed is whether what occurred was legally a fraud or something that may be better characterized as negligence, a breach of contract or sharp business practices. If the victim is satisfied they have a bona fide claim of fraud, another question that is often raised is whether they should make a complaint a civil, criminal and administrative complaint and monitor all three forms of proceeding.
Determining whether what has occurred fits within the legal definition of fraud is not as difficult as some in the legal profession have made it out to be. Fraud may be defined as any form of dishonest or deceptive behaviour that is intended to create a risk of loss. Some say this response is unsatisfactory because it is vague. The reality is that fraud can not be defined with precision because it may appear in as many forms as the human mind can create. It is often helpful to think of fraud as theft by lies – a concept separate from robbery, which is theft by violence, or the concept of conversion, which is theft by stealth.
Often fraudsters will get agitated when criminal cases are referred to in their civil or administrative actions to define fraud. The civil and administrative courts, however, routinely define fraud making reference to criminal cases. For example, in the investment fraud case of Siegel et al v. Hibbert et al, 2012 ONSC 2767, the civil court held:
Criminal Fraud requires proof of (a) a dishonest act involving “deceit, falsehood or other fraudulent means” which (b) causes detriment or deprivation to the victim. In a civil action there need not be a false representation; it is sufficient if there is a fraudulent means: Harland v. Fancsali,  O.J. No. 961.
To find “deceit’ or “falsehood” the trier of fact must determine whether there was an actual representation that a situation was of a certain character, when, in reality, it was not.
Fraud requires a person to be aware of the risk posed to another’s interests. The subjective awareness can be inferred from the evidence. It may also be established by evidence showing that the perpetrator was willfully blind or reckless as to the conduct and the truth or falsity of any statements made: R. v. Theroux,  2 S.C.R.
A sincere belief or hope that no risk or deprivation would ultimately materialize does not establish an absence of fraud. The gullibility of the plaintiffs in believing the misrepresentations of the defendant, or lack of care on their part in failing to make an independent investigation, is no defence to an action based on fraud. It does not lie in the mouth of one who makes a statement on which another relies to say that the other was careless in believing him.
The issue [of fraudulent conduct] is determined objectively, by reference to what a reasonable person would consider to be a dishonest act. Courts have found that the concealment of important facts, the unauthorized diversion of funds, the unauthorized use of an investors’ funds and the unauthorized taking of funds to be fraudulent.
The Ontario Securities Commission, the administrative tribunal that governs those involved (licenced and unlicenced) in the investment industry, relies upon the same case law from the criminal and civil courts: Re Marlon Gary Hibbert (2012), 35 O.S.C.B. 8583.
Why Plead Fraud in the Civil Courts?
Why plead fraud in the civil courts if a less serious allegation such as breach of contract or negligence may result in a judgment in their favour, or if criminal restitution orders or administrative disgorgement orders may result in recovery? The question has merit because not proving an allegation of civil fraud may result in higher adverse cost awards, and proving fraud is often more expensive due to the higher degree of detail required obtain the requisite standard of proof.
A Judgment in Fraud Survives a Bankruptcy by a Debtor
The primary reason to consider alleging civil fraud is to obtain a judgment that becomes a debt that survives bankruptcy. A fraud victim can obtain a judgment which is nothing more than a paper victory if the fraudster, once the judgment is entered, assigns him or herself into bankruptcy. The fraudster in such cases will often list the judgment in his lists of debts, and seek a discharge of that debt. This is why in most claims we issue we seek a Declaration that whatever judgment the Court issues is a debt that is subject to Section 178 of the Bankruptcy and Insolvency Act (BIA). Section 178 of the BIA lists classes of debts that are not released by an order of discharge. It is an overriding social policy that debts resulting from fraud, for example, should not be discharged because if social policy was otherwise, crime would pay. For more information, see the Government of Canada website: http://www.ic.gc.ca/eic/site/bsf-osb.nsf/eng/br02458.html .
A Judgment in Fraud Pierces the Corporate Veil
Often a fraudster will use a corporation to enter into contracts which are fraudulent. This is because the law typically treats a corporation as a separate legal person which is solely responsible for the debts it incurs. The law also typically limits shareholder liability to the capital contributed to the company. On this basis it is said that a corporate veil exists to distinguish between a company as a legal person separate from those who own or control it.
Where a fraudster uses a corporation to undertake a fraud, or where a fraudster seeks to limit his or her personal liability to that of his share capital, a victim should sue the individual who was involved, assisted or benefited from the fraudulent acts. The fraud victim should also seek a Declaration that the corporate veil is pierced, and the judgment is valid as against the individual in the amount of the loss as claimed.
A Claim and Judgment in Civil Fraud Grants Access to a Wider Array of Remedies
A judgment in fraud often grants a wider arrange of remedies than a traditional breach of contract or negligence finding. In breach of contract and negligence cases, the Courts typically grant damages – being a money judgment for the loss. If the Court makes a finding of fraud, the Court may grant rescission, declare the contract void, and place the victim back in the position he or she was before entering into the contract. Conversely, a Court may grant the victim the profits obtained by the fraudster that were concealed from the victim.
In a typical case of breach of contract, a party is not permitted to trace where their money went. If fraud is properly plead, a victim may seek pre-action remedies such as tracing their money to locate and freeze it and to identify those involved in the fraud. Where pre-action remedies are not sought, the tracing of the victim’s money can be done through the discovery process to identify those involved in the fraud and possibly to seek a freezing order over the funds. In other cases a judgment in fraud may permit the tracing and accounting of funds as part of the judgment enforcement process.
A Claim in Civil Fraud Grants Access to a Wider Array of Defendants
Often in criminal and administrative fraud proceedings, the target is only the primary fraudster and / or their conspirators. In civil fraud recovery actions, the victim has the option of bringing action against a wider range of defendants which include conspirators, those who knowingly assisted, and those who benefited.
The foregoing are our views on how fraud cases should be investigated and litigated. Other lawyers may have different views – which is fine as investigations and litigation is an art, not a science. We often suggest to fraud victims that they review the blogs we post to better understand the fraud recovery process. If you discover you are a victim of fraud, we welcome you to contact us to have your case assessed and a strategy for recovery put in place.